Litigation: Managing asymmetrical lawsuits

This article is the first in a series that will address issues raised by managing these David versus Goliath situations, which we refer to more formally as asymmetrical litigations, and the strategies for how to handle them effectively and efficiently.

Your CEO drops a complaint on your desk, telling you to take care of this patent infringement action brought against your large multinational company by a tiny company you have never heard of, in a venue your company does no business in, based on patents that seem only vaguely related to the company’s products, services or business operation. By the way, the CEO tells you not to run up the legal bills, but don’t you dare roll over and pay them what they want. So, where do you go from here?.

Corporate counsel have faced a new dilemma in recent years from the proliferation of asymmetrical litigation—that is, lawsuits brought by small, litigation-driven entities to try and obtain settlements from large multinational companies at a fraction of the significant costs of the action. These entities, referred to affectionately in the patent litigation universe as “patent trolls” or more politely as “non-practicing entities,” consistently follow a litigation strategy to prosecute the lawsuit at a minimal cost by using counsel on a contingency fee basis, while maximizing the costs on their larger adversary, including by inflating discovery costs.

In this way, the plaintiffs turn their small size into an advantage and the large corporate defendants’ resources into a disadvantage. While these David and Goliath situations often arise in patent litigation, they also arise in other contexts, including class actions (e.g., antitrust or securities litigation), employment discrimination cases and product liability matters. Large jury verdicts, the emergence of putative plaintiff friendly venues and rules and tightened corporate legal budgets have all combined to accelerate this trend.

The U.S. District Court for the Eastern District of Texas, a court well-known for its high-stakes patent litigation, has recognized that large corporate defendants often face a Hobson’s choice in deciding whether to settle or defend against asymmetrical litigation:

“Plaintiff has sued over 100 Defendants with the goal of early resolution of the disputes through settlement in a range that essentially amounts to litigation costs… While the Court will not comment on Plaintiff’s strategy, when combined with the requirements of the Patent Rules and the Court’s standard docket control order, Plaintiff’s strategy presents Defendants with a Hobson’s choice: spend more than the settlement range on discovery, or settle for what amounts to cost of defense, regardless of whether a Defendant believes it has a legitimate defense.”

- Parallel Networks LLC v. AEO, Inc.

The court further recognized the potential abuse of the judicial system where such litigation strategies involve plaintiffs filing weak or even frivolous lawsuits with the expectation that they will still receive a payoff from a defendant looking to avoid litigation costs, despite the availability of strong defenses:

“As expressed at the hearing, this Court has some concerns about plaintiffs who file cases with extremely weak infringement positions in order to settle for less than the cost of defense and have no intention of taking the case to trial. Such a practice is an abuse of the judicial system and threatens the integrity of and respect for the courts. Often in such cases, a plaintiff asserts an overly inflated damages model, seeking hundreds of millions of dollars, and settles for pennies on the dollar, which is far less than the cost of defense. Where it is clear that a case lacks any credible infringement theory and has been brought only to coerce a nuisance value settlement, Rule 11 sanctions are warranted.”

- Raylon, LLC v. Complus Data Innovations, Co.

So how do large entities deal with the seemingly no-win scenario created by asymmetrical litigation, without just paying off the troll any time a complaint is filed? The good news is that recent trends in the applicable case law have armed defendants with options to neutralize and even take advantage of these asymmetrical situations, whereby Goliath fends off David, either through outright victory or an acceptable nuisance value cost of doing business settlement.

In this series, we will explore these options through real-world examples found in recent case law, including:

Achieving victory through early motion practice and limited and focused discovery

Focusing on the substantive merits of the action and properly managing the plaintiff

The bedrock of these strategies is resolving the case before getting into expensive discovery by leveraging corporate defendants’ strengths and resources. When early pre-discovery resolution is not possible, defendants are well-served to focus their litigation efforts on the substantive merits of the action and avoid situations that play into the smaller entity’s strengths, for example by engaging in unnecessary and costly discovery disputes. By implementing these strategies that will be discussed more fully in upcoming columns, companies will be well positioned to win the David versus Goliath fight.